NZ investors are slowly turning on to private debt as an alternative asset class but the pace may pick up in line with global trends, a new study suggests.
The first-of-a-kind survey in NZ of almost 30 institutional investors, found private debt “is an under-utilised investment asset relative to the scope to invest” in NZ.
While close to 80 per cent of respondents are local investors, the poll – a collaboration between consultancy firm, MyFiduciary, the Otago University-based Climate and Energy Finance Group (CEFGroup), Griffith University, and NZ-based debt manager, Private Capital Group (PCG) – also tapped a handful of institutions in Australia and the UK.
Private debt (PD) has grown exponentially in offshore markets, including Australia, as more capital-constrained banks have reduced lending to many sectors.
“In search of higher risk-adjusted returns and lower volatility, especially during periods of economic uncertainties, institutional investors are now stepping up their PD allocation… Globally, the PD market has grown tenfold from 2010 to 2020… and has become the second fastest growing alternative investment asset,” the report says.
“… Despite the significant growth in PD globally, the trend does not seem to have extended to Aotearoa New Zealand. That
said, the new capital adequacy framework imposed by the Reserve Bank of New Zealand (RBNZ) on registered banks,
effective July 2022, creates an opportunity for the development of PD in NZ.”
The survey found “lack of experience, lack of liquidity and size of the market” are the main roadblocks to PD growth in NZ but MyFiduciary principal, Greg Peacock, said the tide is beginning to turn.
Peacock said a couple of new NZ managers – Aotea Asset Management and the Private Capital Group – are carving out niches in the local private debt market. It is understood that Aotea, launched in 2021, has landed a mandate from the Accident Compensation Corporation fund, for instance, while PCG, which formed in 2019, launched a wholesale portfolio investment entity (PIE) private debt vehicle last year now holding circa $10 million.
Other Australian managers such as Revolution Asset Management and Metrics (which set up a PIE for NZ investors in 2021) also offer exposure to private loans originated on both sides of the Tasman.
But the nascent NZ private debt market is currently offering more attractive yields even compared to the Australian market, Peacock said, from asset-backed loans.
“There are disproportionate [private debt] spreads in NZ versus Australia,” Peacock said.
He said private debt is typically linked to floating rates that offer some defence against inflation and rate hikes
While the underlying assets are illiquid, Peacock said private debt funds have low duration and now usually provide monthly liquidity.
MyFiduciary has made a “small allocation” to private debt in its model portfolios.
“Our preference is to avoid the property sector and allocate to strategies with asset-backed security,” he said.
The MyFiduciary et al study also found investors expect to wield strong environmental, social and governance (ESG) influence through private debt compared to mainstream assets.
Griffith University professor, Ivan Diaz-Rainey, said in a release: “Our survey results indicate that investors see it as a great way to have an impact on sustainability. Because it’s a much more direct investment between the investor and the investee company.”
However, Peacock said investors should be careful to select managers with significant experience in debt sectors.
Credit defaults have been low for years amid easy money times but he said “the real test is when things are not going so well”.
Private debt could fit in portfolios in a couple of ways, Peacock said, as either replacing the high-yield component of a fixed income allocation or as part of an alternatives basket.